The chief executive of De Bortoli, one of Australia’s largest family-owned wine groups, says Woolworths and Coles are part of the reason local wine producers are suffering and seeing profits dive.

De Bortoli has for three generations successfully operated vineyards in the Hunter Valley and Riverina in NSW and Yarra Valley and King Valley in Victoria, but like many other local winemakers is feeling the impact of the higher Australian dollar and increasing competition from supermarket private label brands.

De Bortoli posted a $24.7 million full-year loss for 2012, according to a report in Fairfax Media’s Business Day. Speaking to BRW on Friday morning,
hief executive Darren De Bortoli told BRW it was partly because of the high dollar, but also largely because some large producers selling cheap wine to the big retailers are rorting the system through claiming tax rebates.

ACCC needs to act

“There’s a phrase used in the industry: ‘you’ve been cliffed’,” De Bortoli says. “It means, ‘if you don’t drop your prices, we will drop your products’.”

While he stocks a large volume of his wine through the supermarkets, he says the government and the Australian Competition and Consumer Commission have been hopeless in curbing the duopoly’s dominance.

“It wouldn’t be so bad if there wasn’t so much concentration,” he says. “When you’re in a market-dominant position, the rules change.

“If we were in the United States they’d be in breach of anti-trust laws. This has been happening for a while, but their power increases year after year. You hope common sense will prevail and there will be changes to legislation affecting such behaviours.”

WET rebate causing wine glut

While the supermarkets are one issue, the bigger problem for De Bortoli is that small grape growers are falling victim to rorting by larger producers under the government’s wine equalisation tax (WET) rebate scheme.

WET is a tax applied based on value at 29 per cent of the wholesale price. The rebate allows a payment of up to $500,000 to be made to Australian wine producers who have sales below $1.72 million.

De Bortoli says this is still a substantial amount, and has seen a number of what he calls “large” producers undercut winemakers including his own.

According to a 2011 report by The Allen Consulting Group, the WET rebate favours production of cheaper, higher alcohol content wine. The report says the rebate has contributed to Australia’s wine glut by encouraging producers to produce wine on the basis of volume, rather than value, and contributing to oversupply.

The report also backs claims made by De Bortoli that some producers are “rorting” the system and estimate that this is costing taxpayers up to $50 million a year.

De Bortoli says it’s “completely destabilising the industry” and it’s been the small grape growers who are the victims in a system that allows large producers to rort.

“The retailers are beneficiaries of that because these [rorting] growers have to sell to someone,” he says. “It’s the large growers that are in a position to do this because they have the volume to negotiate good rates for contract processing. They sell at cost, yet put 29 per cent rebates in their pockets.”

The industry is now in discussion with the Gillard Government about how to stop the rorts, but De Bortoli says the situation has reached “crisis point” and is forcing wine producers to slash costs.

“There’s just so much pressure,” he says. “The proverbial fat’s been cut, and now it’s cutting into the meat of the body. All [wine producers] are doing is cut, cut, cut. We are cutting costs everywhere – in the supply side ... and in staffing levels.”

China is still a positive

De Bortoli has offices in the US, UK and Europe and exports to over 70 countries. The only positive story in a negative 12 months has been China, De Bortoli says.

Although this has been a doubled-edged sword: “On the one hand, China’s a positive story, but on the other, they are also responsible for [contributing to] the strong Australian dollar through insatiable demand for resources and energy,” he says.

Nevertheless, he says he’s been surprised about how “sophisticated” the Chinese are becoming in their wine tastes, and it continues to be a lucrative market for De Bortoli.

Wine Australia research released last month shows the number of wine exporters for the year ending March 2013 increased by 10 per cent from 1274 to 1395, with exporters to the Chinese market the largest group (927), ahead of the UK (274), Canada (264), the US (218), and Germany (115).

Australian wine exports grew in both volume and average value, with the volume of Australian wine exports up two per cent to 719 million litres (valued at $1.85 billion). The average value for bottled wine was up two per cent to $4.43 per litre and bulk wine up one per cent to $1.02 per litre.

“The growth in wine exports at higher price segments in markets such as the US and China and the increase in the number of companies exporting wines are both positive indicators for the Australian wine sector,” Wine Australia’s general manager market development, James Gosper, says. “But the industry remains cautious.”

Gosper says while exports to China dropped by three per cent overall, this was driven by major declines at lower price segments.

Exports to China in the above A$7.50 per litre grew by 28 per cent but the growth rate has slowed from an average annual rate of 43 per cent over the previous five years. The average value in exports to China increased by 18 per cent to $5.85 per litre.